The Comprehensive Guide to Buying Property in South Africa for Non-Residents: Tax and Legal Considerations

South Africa, a land of breathtaking landscapes, pristine coastlines, diverse wildlife, and rich culture, has become an increasingly popular destination for foreigners seeking to invest in real estate. The rise of remote work, spurred by the COVID-19 pandemic, has further increased the allure of purchasing property in South Africa. As a non-resident, it's essential to understand the tax and legal implications before diving into this exciting investment opportunity. In this comprehensive guide, we'll explore everything you need to know about buying property in South Africa as a non-resident, including exchange control regulations, income tax, capital gains tax, withholding tax, and determining your tax residency status.

1. Determining Your Tax Residency Status:

Before delving into the tax implications of purchasing property in South Africa, it's crucial to understand whether you're considered a resident or non-resident for tax purposes. South African tax residency is primarily determined by the "physical presence test." Under this test, you'll be considered a tax resident in South Africa if you meet any of the following criteria: 

- You're present in South Africa for more than 91 days in the current tax year and in each of the previous five tax years

- You're present in South Africa for a total of more than 915 days during those previous five tax years

- You're present in South Africa for a period or periods exceeding 183 days in aggregate during the current tax year

If you don't meet these criteria, you'll be considered a non-resident for tax purposes. It's important to note that tax residency status can have significant implications for your tax liabilities in South Africa, so it's essential to consult a tax professional for personalized advice.

2. Navigating Exchange Control Regulations for Non-Residents:

When purchasing property in South Africa, non-residents must be aware of the country's exchange control regulations. These regulations ensure that all funds introduced from outside South Africa for acquiring fixed property can be repatriated, along with any profit on resale, after deducting any applicable Capital Gains Tax (CGT). To comply with these regulations, non-residents must provide proof of the introduction of funds when the property was initially purchased.

In cases where funds are introduced as a foreign loan to acquire corporate entities owning property in South Africa, these funds can also be repatriated. However, this is subject to the South African Reserve Bank's original loan approval.

3. Choosing the Right Ownership Structure:

Property in South Africa can be owned individually, jointly in undivided shares, or by an entity such as a company, close corporation, trust, or a similar entity registered outside South Africa. Understanding the different ownership structures is essential, as each has its unique tax implications and regulatory requirements. It's crucial to consult with a local tax professional or attorney to determine the most suitable ownership structure for your investment.

4. Understanding Income Tax for Non-Residents:

South Africa operates under a revenue-based income tax system, which means that income earned from a South African source is subject to ordinary income tax. As a non-resident earning rental income from South African properties, you'll need to register as a South African taxpayer and declare your rental income accordingly. Income tax rates for non-residents are progressive and vary depending on the amount of income generated.

Expenses such as interest payments, insurance premiums, agent's commission, and maintenance costs can be deducted from rental income to reduce your taxable income. It's crucial to maintain accurate records of these expenses to ensure compliance with South African tax regulations.

5. Capital Gains Tax (CGT) Implications for Non-Residents:

Non-residents are required to pay CGT on the disposal of:

• Immovable property situated in South Africa, including any rights or interests in such property

• Assets of a permanent establishment through which trade is carried on in South Africa

 The CGT payable by non-residents is calculated by adding 40% of the capital gain or profit to the individual's income for that year. The capital gain is calculated by subtracting the acquisition costs, transfer costs, and property improvement costs from the selling price, and then subtracting a further allowable annual deduction of ZAR40,000 (US$2,857). 

The resulting amount is subject to CGT at the maximum effective rates of 18% for individuals, 22.4% for companies, and 36% for trusts.

6. Decoding Withholding Tax for Non-Resident Property Sellers:

Withholding tax is a crucial consideration for non-resident sellers of immovable property. When foreigners sell their property, an amount of the sales price is withheld by the buyer or conveyancer as an advance payment towards the foreign seller's final South African income tax liability. This is only applicable when the amount payable by the purchaser is R2 million and above. The balance after the tax liability is refunded to the foreign seller.

The withholding tax amounts are:

• 7.5% of the amount payable if the seller is a natural person

• 10% if the seller is a company

• 15% if the seller is a trust

Conclusion

Purchasing property in South Africa as a non-resident can be a rewarding investment, but it's essential to understand the tax and legal implications involved. By determining your tax residency status and familiarizing yourself with exchange control regulations, income tax, capital gains tax, and withholding tax, you'll be better prepared to navigate the South African property market.

Consulting with a local tax professional or attorney is highly recommended to ensure compliance and optimize your investment strategy.

Disclaimer: The information provided in this article is for general informational purposes only and was accurate at the time of publishing. While we strive to keep the information up-to-date, we cannot guarantee its ongoing accuracy due to the changing nature of tax laws and regulations. This article does not constitute legal, tax, or financial advice. We recommend that you consult with us directly to obtain the most appropriate and up-to-date information applicable to your specific situation. We shall not be liable for any loss or damage arising from or in connection with the use of this information without seeking personalized advice from DigMe Solutions.